Published on
28/7/2022
12/10/2022

Small but sustainable: venture capital is trailblazing the path to Net Zero

‘Net zero’ is regarded as absolutely crucial to keep global warming to no more than 1.5°C higher than the pre-industrial period, and was called for in the landmark globally binding 2015 Paris Agreement.

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Portfolio
ESG
Market Insights

It is estimated that carbon emissions need to be reduced by 45% on current levels by 2030 and reach net zero by 2050. 

Net zero means that greenhouse gas emissions from human activities need to be reduced to as close to zero as possible, with any remaining emissions re-absorbed by the world’s oceans and forests, so that atmospheric carbon dioxide levels stop rising and stabilise. Business has a responsibility both to be at the forefront of this movement and help to raise global ambitions to act to bend the carbon curve downwards.

Large, public companies are lagging

A number of established publicly listed companies have stated their commitment to the Net Zero 2050 initiative. However, it is becoming apparent that there is a gap between their stated net zero intentions and their action plan to reduce their emissions. It has been recently reported that 85% of the top 100 companies by market capitalisation listed on the FTSE do not have sufficient carbon-reduction targets that would limit global warming to ‘safe’ levels. According to a report by a specialist ESG research house published in late 2021, nearly half of the FTSE100 constituents do not have a credible net zero target at all, despite the climate crisis having become more widely appreciated.

Scoping out emissions

One of the difficulties that large companies face is measuring, and then attempting to reduce, their Scope 1, 2 and 3 emissions, which are defined as follows:

  • Scope 1 emissions are those that the company makes directly, for example a vehicle manufacturer would create direct emissions from making cars.
  • Scope 2 are those emissions that are indirectly produced by a business, such as the electricity it uses for air-conditioning its manufacturing premises.
  • Scope 3 are emissions not directly created by the company itself but across its value chain, and in this vehicle manufacturer example, this could be the emissions created by its steel, glass and plastics suppliers.

While scope 1 & 2 emissions are more readily quantifiable, scope 3 emissions are far-ranging and more challenging to accurately measure. And, from a climate change perspective, the bulk of a company’s emissions may well fall into this nebulous category. Yet only around a third of FTSE100 companies have a target to reduce this category of emissions.

Smaller businesses offer leading commitments in climate change fight  

The private equity and venture capital sector is perhaps better placed than larger companies to lead the way against climate change, by virtue of generally being smaller in scale and more innovative. The lack of complex legacy operations in the sector can make it easier to measure these emissions across their operations, in all three scope categories. Venture capital in particular also tends to be more heavily involved in future-facing businesses where innovation is providing some of the carbon-related solutions the world needs in the battle against climate change.

Both of these factors place them further ahead in the race towards net zero than some of the established large- and mega-cap firms. 

The venture capital (VC) industry as a whole is also showing a strong collective commitment towards a net zero future, through a variety of initiatives. For example, in the UK, the British Venture Capital Association has recently published its report entitled 10 Steps to Net Zero: Private Capital in Action., which makes for encouraging reading around specific steps that the sector is taking to help in the economy’s transition to net zero.

There is also the Science-Based Target initiative (SBTi), which is a private equity (PE) sector plan featuring tailored guidance for PE firms on compiling a greenhouse gas inventory and identify commonly faced challenges to developing achievable emissions targets, with recommendations to overcome these barriers. This is the type of ‘can do’ attitude that is needed across all business sectors in this collective battle against damaging climate change.

With enough action, ‘net zero’ is genuinely achievable

These are just some of the initiatives in which the VC and PE sectors are engaging to perform a critical role in decarbonizing the economy and driving sustainable practices. Where these small and innovative portfolio firms lead, hopefully the large public companies will follow. By mobilising investor capital and scaling up sustainable innovation, and inspiring others to do their bit for emissions measurements and eventual reductions, ‘net zero’ can become a genuine reality, rather than a distant aspiration.

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